The Third Quarter Was Tranquil. The Fourth Might Not Be.

The S&P 500 climbed nearly 8% and the Nasdaq Composite added more than 11% in the third quarter. (NYSE)

Key Points

• In the third quarter, the S&P 500 climbed nearly 8%, the Nasdaq Composite added more than 11%, and the Russell 2000 jumped 12%.
• Technology and communication services now comprise nearly 47% of mega- and large-cap stocks, exceeding the 2000 dot-com bubble record.
• One strategist says October holds potential for volatility, with a possible pullback before year-end 2025.

After evading the September curse, some strategists think things could get scary in October and beyond for stocks.

The third quarter was a good one for the market, with the S&P 500 climbing nearly 8% and the Nasdaq Composite adding more than 11%. Even small-caps, which have long underperformed, joined the party, with the Russell 2000 jumping 12%.

Yet looking at the big picture, the usual suspects had the best showing.

As Trivariate Research Founder Adam Parker highlighted in a note over the weekend, on a market-cap basis, just five stocks—Google parent Alphabet , Apple , Nvidia, Tesla, and Broadcom —added more than $2.9 trillion in market cap during the quarter.

In fact, the two sectors that contain the most big tech and artificial intelligence plays—technology and communication services—are now nearly 47% of the mega- and large-cap universe of stocks, eclipsing their previous record during the 2000 dot-com bubble. At the other end of the spectrum, real estate, energy, materials, and utilities are now just 8.5% of the large-cap bucket, the lowest they have ever been, Parker writes.

Of course that raises ongoing concerns about market concentration and too many hopes pinned on too few AI winners. Still, investors can take some comfort in the fact that stocks with big moves are at least backing them up with bottom-line momentum. Earnings in general are expected to climb, with consensus calling for 9.2% growth this year and 14% next year, and not surprisingly, tech and communication services are expected to see the highest growth, along with healthcare.

Putting that aside, some strategists still worry any seasonal weakness that usually happens in the third quarter may have been simply delayed into the fourth.

With the government shutdown ongoing, and earnings season not yet begun, the market will have a dearth of data to trade on in the next few weeks, meaning big swings are unlikely, argued Jeff Jacobson, 22V Research head of derivatives strategy, in a weekend note.

“While I am not saying it can’t happen, I believe owning volatility (specifically hedges) is far more attractive for November/December since by then I would expect the shutdown to be over and then we will also get the bulk of earnings announcements (especially from the mega cap technames),” he writes.

Indeed, slower gains or even a pullback would be part of a normal bull cycle, meaning even optimists are on the lookout for a potential pause.

Evercore ISI’s Julian Emanuel notes the decision by videogame giant Electronic Arts to go private via the largest leveraged buyout in history reinforces his thesis that we are still in the midst of a risk-on bull cycle that could carry the S&P 500 to 7750 next year.

Nonetheless, the path there almost certainly won’t be a straight line, despite nearly everything going right for the market.

October holds the potential for volatility, he wrote Sunday. His base case is for a pullback that “could materialize before year-end 2025, driven by investor complacency to domestic politics, geopolitics, economic questions, and a swift rotation toward the traditionally defensive health care sector.”

Still, any healthy rally includes selloffs, so an end-of-year shakeup need not be too frightening, particularly as S&P 500 targets keep marching upward. After all, spooky season can’t last forever.

Write to Teresa Rivas at teresa.rivas@barrons.com